The Storm that Sank Hanjin Shipping

Last summer Hanjin Shipping failed. It was only the sixth largest container shipping company in the world, but its bankruptcy may be the first of many in an industry caught in very heavy weather of its own making.  ...

Dave Lewis Has a Problem with Booze

Dave Lewis has been Tesco’s CEO since September 2014. As we said in an earlier post, his challenge is to counter the growing threat from discounters in the UK like Aldi and Lidl by holding on to a core set of customers who prefer Tesco’s variety and convenience over the discounters’ low prices. At the same time, he has to cut costs to support that still-big but smaller business. But Lewis is likely to find that harder to do than we first expected. That is because a £12.99 whiskey from Aldi won the top prize in a blind taste test, beating many of the famous brands that Tesco carries. Aldi has now received 12 major accolades in the past three years for its drinks, along with awards for many other products. The whiskey awards are a clear sign that ALDI is moving upmarket from a limited selection of low-priced generic products to a broader array of value-priced premium products. Aldi plans to offer nearly a third more premium products than it had in UK stores last year, and it’s broadening its appeal with more fresh foods. Aldi is after the customers Tesco plans to keep, shoppers who want higher quality and lots of choice. It’s following a classic strategy used by disruptors in industries from steel to groceries to disk drives. Successful new entrants get more resources, improve their capabilities, and start to move upmarket, drawn by higher growth and profits. They often keep a cost and pricing advantage as they move up, just as Aldi has vowed to do: “Whatever our competitors plan to do…we will not let them...

Terrifying Tesco

A few days ago Tesco announced its worst full-year loss ever and one that ranks among the biggest in the history of British business — £6.4 billion. The company took a cart load of special charges to account for three years of declining sales, profits, and cash flows and a financial reporting scandal. It also disclosed uncomfortably high leverage (adjusted debt to EBITDAR of 7.4x) and limited amounts of liquidity (a liquidity position of £3.4 billion). There are signs Tesco is getting better. It cut prices, improved service, laid off staffers, closed stores, and agreed to start funding its pension deficit. Customer traffic and purchases in the UK are growing again, and the rate of sales decline there slowed to (1.0%) in Tesco’s fourth quarter. Tesco’s CEO “Drastic Dave” Lewis made a lot out of this, saying, “They are pretty good vital signs,” and, “This patient is OK.” But he may be discounting his company’s immediate tactical problems. Worse, he may ignoring a long-term strategic threat. Tactically, Tesco is still in retreat. Discount grocers Aldi and Lidl are capturing more and more share from Tesco and the other mid-market chains in the UK. And they’re gaining at a growing rate.   We don’t think Lewis is trying to transform Tesco into a low-cost, low-price chain and win back lost market share. He’s trying to hold on to a core set of customers who prefer Tesco’s variety and convenience. He understands he has to shrink to a cost base that supports that still-big but smaller business. His plan may succeed in the short run but fail in the long run.  This has to do...

Men’s Wearhouse Plays Defense

On September 18, 2013 men’s clothing retailer Jos. A. Bank (ticker JOSB) made a $2.3 billion unsolicited offer to acquire larger rival Men’s Wearhouse (ticker MW). JOSB was seeking to take advantage of MW during a vulnerable time for the company. The MW Board of Directors had dismissed its founder, public spokesman and executive chairman George Zimmerman in June due to disagreements over company strategy. Shortly afterwards, the company announced a cut in its expected profit forecast. Even though the offer price was a substantial premium to MW’s market price, the MW Board considered it below the intrinsic value of the company. After rejecting the offer, the Board implemented a flip-in poison pill that would allow existing shareholders to acquire stock at a discount if a third party acquires more than 10% of the company in a transaction not approved by the Board. In November, MW went a step further by undertaking a Pac Man strategy, launching its own $1.5 billion unsolicited offer to acquire the smaller JOSB. The JOSB Board rejected the unsolicited offer, declaring it too low and not in the best interest of shareholders. MW vowed to continue its pursuit of JOSB, possibly by nominating its own directors at the next JOSB shareholder meeting. On January 6, 2014, MW further increased the pressure on JOSB by increasing its bid from $55.00 per share to $57.50 per share, placing a value of $1.6 billion on the company. There is still a chance the two companies will combine their operations, as most analysts believe it makes strategic and financial sense. But who will play the role of acquirer and who...

The Rise and Fall of Kodak

Kodak dominated mass-market consumer photography for over a century. But it failed to meet the challenge from digital photography and went bankrupt a year ago. How could a company as strong as Kodak fail so badly? This post explains what happened to Kodak. In our next post we’ll explain why it happened in terms of an important risk dynamic we call the “Incumbent’s...